The document discusses the impact of competition and regulation on service sectors within the EU, emphasizing the need for competition-friendly reforms to enhance economic performance. It highlights that service sector regulation often hinders competition and proposes analyzing the effects of entry and conduct regulations on productivity. Additionally, the outcomes of various reforms, particularly in professional services, suggest significant potential gains in efficiency and economic performance.

1. Discussion Session II:
The consequences of
competition and regulation in
services
Erik Canton,
European Commission
Conference on Structural Reforms Product Market Competition,
Regulation and Inclusive Growth
Paris, 11 June 2018 1

2. European Commission
Economic and financial affairs
Structure
 Motivation
 Specific points regarding both papers
 Related work done in European Commission
2

3. European Commission
Economic and financial affairs
Motivation
 Market services are the largest economic
sector (e.g. generating about 50% of euro
area GDP)
 Strong backward (demand) and forward
(supply) interlinkages with manufacturing
 Regulation of service activities is often
impeding competition, with adverse
consequences for economic performance
 Push for competition-friendly reforms (cf. the
EU's Country-Specific Recommendations)
3

4. European Commission
Economic and financial affairs
Services in the EU: What kinds of
regulatory policies enhance productivity?
 Multi-country setting, based on firm-level data
 Split into entry and conduct regulation
 Regulations matter more when institutions
are weak, an industry is close to the frontier,
or a firm is foreign owned
***
 Logic behind the stronger impact of conduct
regulation?; more scope for reform of entry
regulation
4

5. European Commission
Economic and financial affairs
Entry and conduct regulation in 19
EU countries (OECD's PMR)
5
0
0.5
1
1.5
2
2.5
3
3.5
4
Legal Accountancy Architects Engineers
entry
conduct

6. European Commission
Economic and financial affairs
Service regulations, input prices and
export volumes: Evidence from a
panel of manufacturing firms
 Firm-level data from Spanish manufacturers
 Price of intermediate consumption linked with
regulatory impact indicator
 Investigation of firm's exports (impact of
regulation through input prices)
***
 Heckman 2 step approach to distinguish
extensive and intensive margin?
6

7. European Commission
Economic and financial affairs
Further points
 Another interesting dimension would be to
look at impact on current account balance:
 (+) deregulation spurs exports
 (-) deregulation leads to expansion of non-
tradable sector
 Further explore consequences for
sequencing of reforms: Should we prioritise
service sector reforms depending on situation
w.r.t. institutions and technology gap?
 Inverted-U relation in case of intangibles?
 Political economy of service sector reform
7

8. European Commission
Economic and financial affairs
Work done in European Commission
 Benchmarking and preparation of thematic
discussions in the EPC and Eurogroup
 Econometric analyses on impact of business
environment (PMR, Doing Business) on
productivity, FDI, allocative efficiency, mark-
ups
 Impact of actual reforms
 Impact of reforms in closing-the-gap scenario
8

9. European Commission
Economic and financial affairs
Econometric analyses
 Impact of regulation on allocative efficiency in
regulated professions
 Panel regressions with country & sector fixed
effects
 First step: A one point decrease in PMR
would increase churn rate by 1.75%-point
 Second step: This increase in churn rate
leads to an increase in AE by 5.7%-point
9

10. European Commission
Economic and financial affairs
Productivity gains of reforms of
professional services
 Reforms of legal services in Portugal reduced
PMR by 0.63
 This is expected to increase business churn
by 1.1%-point, and allocative efficiency by
3.6%
 Results from simulations with a DSGE
(QUEST) show impact of GDP and
employment over time
10

11. European Commission
Economic and financial affairs
Closing-the-policy-gap: impact on AE
Legal activities Accounting activities Architecture and
engineering
PMR in DE 3.56 2.60 2.219
PMR in UK 0.79 1.75 0.365
Change in PMR in a
closing-the-policy-gap
scenario
-2.77 -0.85 -1.854
Impact on business
churn
4.84%-point 1.49%-point 3.24%-point
Impact on AE 0.16 0.049 0.107
DE's predicted AE
after the reform
-0.12 -0.03 0.07
AE in UK 0.06 0.15 0.06
Impact on labour
productivity (%)
12.7% 3.7% 8.2%
11

12. European Commission
Economic and financial affairs
Closing-the-policy-gap: impact on
mark-ups
Simulated reform in professional services
PMR in professional services in DE 2.65
PMR in professional services in UK 0.82
Change in PMR in a closing-the-policy-gap scenario -1.83
Impact on mark-up -0.094
Mark-up in DE 0.20
Mark-up in DE in a closing-the-policy-gap scenario 0.106
Mark-up in UK 0.10
12

13. European Commission
Economic and financial affairs
Macroeconomic impacts using QUEST
(combined effect of mark-up and AE)
13

14. European Commission
Economic and financial affairs
Thank you for your attention!
erik.canton@ec.europa.eu